Housing Test Examiners Mark Scheme
1)
Define the following terms (3 marks each)
(i)
Housing supply
Quantity of housing available for sale in the market at a given price in a given time period (2 marks)
Affected by rate of new house-building (1 mark)
Also by number of existing homes put on market (1 mark)
Housing supply often inelastic in the short run (1 mark)
Max of 2 if no mention is made of supply being linked to price
Max of 2 if no mention is made of time period
(ii)
Real interest rates
Real interest rate is the money (or nominal) rate of interest adjusted for inflation
I.e. real cost of borrowing money
Or real return on saving
Candidate may use an example – credit if accurate (e.g. nominal interest = 6%, inflation = 4%, real r = +2%
Max of 1 if no mention is made of the inflation adjustment
2)
Using the information in chart (1), explain how changes in house prices can affect the level of
employment in the construction industry (4 marks)
Chart 1: Employment in Construction and UK House Prices
200000
180000
180000
160000
160000
140000
140000
120000
120000
100000
100000
Person (millions)
80000
80000
2.25
2.25
2.20
2.20
2.15
2.15
2.10
2.10
2.05
2.05
2.00
2.00
1.95
1.95
1.90
millions
GBP
Employment (millions) and average UK house prices (£s)
200000
1.90
Q1
Q3
02
Q1
Q3
03
Q1
Q3
04
Q1
Q3
05
Q1
Q3
06
Q1
From 2002-2007, house prices rose by
approx 50% and, over the same time
period, employment in construction
increased by around 250,000 (or 15%).
This suggests a positive relationship
between house prices and employment.
Most students will use the concept of
derived demand i.e. as demand for
housing increases and prices rise, we
expect to see an expansion of housing
supply. This increases the demand for
factor inputs used in construction
including labour – causing a rising
demand for labour.
Q3
07
08
Source: Reuters EcoWin
Max of 2 if no use is made of the data from the chart
Max of 2 if the answer refers to employment in the whole economy rather than focusing on construction
3) As chart 2 shows, in recent years, the real cost of renting a property has increased. With the help of a
supply and demand diagram, explain why this might have happened (6 marks)
Rising real cost of rents might have been due to demand and/or supply-side factors
Reward an accurate and relevant explanation using either approach
Max of 3 if there is no supporting supply and demand diagram
Most answers will show
Chart 2: Inflation in Housing Rents
Annual percentage change
4.0
4.0
3.5
3.5
% change in cost of renting
Percent
Outward shift of demand for rented property
With upward-sloping supply / inelastic supply,
this will drive equilibrium level of rents up
3.0
3.0
2.5
2.5
2.0
2.0
% change in consumer prices
1.5
1.5
1.0
1.0
Jan
May Sep
03
Jan
May Sep
04
Jan
May Sep
05
Jan
May Sep
06
Jan
May Sep
Jan
07
08
Source: Reuters EcoWin
Might also have been due to an inward shift in
the supply of rented property
Or demand for rented properties increasing faster
than demand.
Explanations: (up to 3 marks for a coherent and
valid explanation) e.g. students might discuss
how rising house prices has affected affordability
causing fewer people to be in the market for
owner occupied homes, rented property is a
substitute.
4) Evaluate the view that all government controls on new house building should be removed (14 marks)
Lots of responses are valid to this question. But candidates might include the following:
New houses are built: (implied) cheaper housing, particularly for younger households; production of
negative externalities; infrastructure costs; loss of leisure facilities; and the loss of external benefits
such as the visual amenity of a more natural landscape.
Good answers should discuss how government controls may affect the private and the external benefits
and costs of house building. Examples include the benefits to construction firms and to industries
allowed to locate on what was previously green belt land, a possible acceleration of urban decline in
inner-city low cost housing areas, and the effect on neighbouring communities.
To achieve more than 7 marks, candidates will need to make plausible judgements about the issues
posed by the question. Good answers may display candidates’ knowledge of, and ability to analyse and
evaluate the consequences of the difference between external and private costs and benefits.
The issues identified below are intended to provide an indication of some of the areas which might be
discussed. Candidates can only be expected to consider a few of these issues in the time available.
Identification of private costs and benefits in the context of the question;
Identification of external costs and benefits in the context of the question;
Explanation of how unregulated markets may generate market failure(s);
The possibility of government failure resulting from controls on house building;
Discussion of different types of government control